Yesterday, a friend of mine shared with me the great news that he was planning on starting a family and asked: “What is the one skill that you would love to teach your daughter as she grows up?” Almost immediately I answered,“The ability to make smart decisions on a consistent basis when I am not in the room.”
One trait that I believe has shaped me profoundly in the decisions I make in my career, with my family and in life, is the ability to make decisions guided by a set of principles. I call these my guiding principles; essentially they are a shortlist of mental models that tie into my beliefs. You could say that they are helpful one-liners that help me make better decisions.
In starting The Angel Investing School, I had the opportunity to catch up with a range of people who I knew were successful angel investors (people who invest in new businesses) and it was apparent that there were common themes, within the lessons learned from each of their experiences; that became the guiding principles that helped them avoid making mistakes.
I recognise that investing in new businesses (startups) has become democratised, with platforms such as Crowdcube and Seedrs that allow individuals to invest as little as £20 into startups. However, the problem exists when the access to invest is so easy that many who take the leap have not had the education to understand what they are investing in. People are taking a gamble as they don’t understand the risk associated with their investment and what returns could look like in the eventuality that the company is acquired (bought by a bigger company) or has an IPO (Initial public offering is when a company gets listed on a stock exchange like FTSE 350 in the UK).
I also recognise that there is a new breed of potential investors, who are digitally savvy, some are young and rich such as content creators (think vloggers and musicians). Others include professionals who have worked several years in their career, building domain expertise and a broad network but have no clue where to get started with investing in startups. The remainder are entrepreneurs who have successfully grown their companies and are at a stage where they want to invest back into new emerging startups, leveraging their experience and expertise to support others like they were supported too.
The guiding principles below are my own personal principles and I don’t share them as an oath or a contract but as insight into what helps me make better decisions when investing in startups.
- Angel investing shouldn’t be the first investment you make
- Play the long game and embrace the downside
- Take your time, and do your due diligence
- Get to grips with tax relief
- This is a team sport
- Don’t transact, nurture winning relationships
- Invest in what you understand
- Add value beyond the capital
1. Angel investing shouldn’t be the first investment you make
Most high-net-worth individuals and sophisticated investors allocate less than 5% of their wealth to angel investing as it is such a risky asset class. Typically, wealth has been built up from a range of other asset classes from investing in land & property to public stocks & shares. They are investing what they can afford to lose with angel investing similar to the money they could afford to lose at the casino. As tempting as it may be, learn the rules of engagement, play the long game and be disciplined and patient. Avoid making a bad investment you cannot afford, which puts you off investing ever again.
2. Play the long game and embrace the downside
Don’t invest too much too soon given that over 90% of your investments will probably fail. A common situation is where you have saved up £50K (which is a significant amount of money) and you blow it all within two months out of excitement and the thrill of investing. You soon realise you placed a lot of bad bets, and you have no money to double down and follow on with the good performers. The wise investor sets boundaries such as investing up to 1/3 and saving 2/3rds for follow-on investments into companies that go on to perform well. Go in with your heart AND your head and invest in a few companies a year for a long duration of time like you would if you were a value investor in Index Funds. Embrace the downside and remember it is a continuous learning journey.
3. Take your time, and do your due diligence
Some new angels feel uneasy and guilty taking founders’ time and rushing to make hasty decisions to invest. Remember, it is a significant amount of money, spend time getting to know the founding team, the product, the customers and the market. Bounce the opportunity off a trusted set of advisors to make an informed decision. They might raise the red flags you failed to see.
4. Get to grips with tax relief
This is UK specific, but SEIS/ EIS (Seed Enterprise Investment Scheme/ Enterprise Investment Scheme) enables investors to reduce risk and do more with the money you have. Both schemes are designed to encourage investment into early-stage growth-focused companies, providing tax relief (some money back!).
5. This is a team sport
Startups often raise anything from £50K to £300K in their first funding round. Therefore angel investors often invest alongside other angels to close the round. Joining networks and spending time with founders to foster relationships gives you access to deal flow and enables you to share deals with others and get advice from them too. It can be a lonely journey so value the communities you could join. Get help from others who have already been on the path you are about to go on. All of these lessons are from angel investors I have learned from.
6. Don’t transact, nurture winning relationships
Don’t be blinded by a big market or exciting idea, the highest risk is the founding team’s ability to execute on their idea. Remember, you are in it for the long haul and the only thing that is guaranteed when you invest in that you buy the right to participate in an exponential learning journey. There will be some highs but probably a lot more lows, and those are the times you need to support the founders most. Create memos or keep a journal so that you can track why you invested, how you were feeling and lessons learned along the journey.
7. Invest in what you understand
Stick to your core competence and invest only in what you understand. For this reason, I don’t invest in crypto and certain aspects of deep tech. A lesson learned from value investors Charlie Munger and Warren Buffet who were comfortable in missing out of big tech companies like Google and Facebook as they focused on what they knew well and ignored opportunities outside of that. If you worked in marketing for 20 years in an FMCG company then a good place to start could be by focusing on marketing tech and/or FMCG startups.
8. Add value beyond the capital
A brand is built through founders sharing with others how helpful you have been, especially during the difficult times. Four things really stand out to me here:
- Empathy to understand what the founding team feels and listen sometimes without a solution, just listen and be present.
- An ability to fill knowledge gaps.
- Introductions to customers, partners and fellow investors (if needed).
- Deliver quality contributions consistently.
The Angel Investing School is about what you could do with the money you can afford to lose. Adhering to the principles above should help teach you how not to lose it. My hope is that once participants complete the course, they leave equipped to make smarter investment decisions on a consistent basis.